Commercial Leases In Kenya
Properties intended for investment or income-generating purposes, for example, through rental income may be referred to as commercial properties. These properties include office buildings, retail spaces, warehouses, shops, and other types of properties. These commercial properties can be leased; therefore, commercial leasing is an essential aspect of business transactions. At its basic, a lease can be termed as a legal agreement between a landlord/lessor and a tenant/lessee for the use of a commercial property.
Commercial leasing agreements in Kenya are mainly governed by the Land Act. Other legislations to consider are the Landlord and Tenant Act, and the Business Premises Rent Tribunal Act.
There are unique terms and responsibilities related to the upkeep of the property, payment of service charge and responsibilities of the landlord and tenant. For example, with reference to responsibilities, a tenant may be obligated to maintain or schedule periodic repairs of the interior of the property whilst the landlord maintains the structure of the building. In most cases both parties may be required to obtain insurance where the landlord insures against common areas while the tenant insures within their premises.
Lease Terms: Lease terms in Kenya are usually negotiable between the landlord and the tenant. The lease term is the length of time that the tenant will be occupying the property. It can range from a few months to several years. Lease terms can be fixed or renewable, depending on the agreement between the landlord and the tenant. Landlords typically engage commercial leases that have a minimum duration of five years to avoid being governed by the protection of tenancies legislation. The reasoning is that, if the lease is for less than five years, the property may be classified as a controlled tenancy. However, in normal circumstances, commercial leases in Kenya can last anywhere between five to twenty years. From experience, our clients seek for leases of about 5 years and 3 months upwards.
A controlled tenancy is a type of tenancy governed by the Rent Restriction Act in Kenya. It protects tenants from excessive rent increases and arbitrary eviction by landlords. Often the rent payable for property is controlled by the government. However, they are less common in Kenya today, as most commercial tenancies are now governed by the more flexible provisions of the Landlord and Tenant Act.
Rent: Rent is the amount that the tenant pays to the landlord for the use of the property. The rent can be a fixed amount or can be based on a percentage of the tenant’s sales. In Kenya, landlords are required to provide tenants with a rent receipt for each payment made. Rent is subject to VAT and will likely have an annual escalation mechanism built into the lease agreement.
Security Deposit: A security deposit is a sum of money paid by the tenant to the landlord as a guarantee of payment. The security deposit is refundable at the end of the lease term, provided that the tenant has fulfilled all the terms of the lease agreement. In practice, this amount tends to be the equivalent of three (3) months’ rent and is not subject to VAT.
Repairs and Maintenance: The lease agreement should clearly state who is responsible for repairs and maintenance of the property. Generally, landlords are responsible for major repairs, such as structural issues or roofing problems, while tenants are responsible for minor repairs, such as replacing light bulbs or fixing minor leaks.
Subleasing: Subleasing is when a tenant rents out a portion of the property to another party. In Kenya, subleasing is only allowed with the landlord’s consent, and the sublease agreement must be in writing.
Termination: Lease termination can occur when the lease term expires or if the tenant breaches the terms of the lease agreement. In Kenya, landlords are required to give tenants a notice period of at least one month before terminating a lease agreement. However, having a termination clause could mean that the lease is a controlled tenancy. As such, leases will not have a termination clause.
Commercial lease vs Residential lease
Commercial leases and residential leases are distinct in many ways, particularly in legal terms. As a start, commercial leases are subject to fewer consumer protection laws than residential leases. As a result, commercial tenants do not have the same level of privacy protection, and there are no limits on the amount of security deposits that can be charged. In addition, evicting a commercial tenant for violating the lease is often easier than evicting a residential tenant, as the law provides more protection for the latter.
Unlike residential leases, there is no standard form for commercial leases. While this allows for customization to meet the landlord’s needs, it requires careful review by tenants before signing the lease. Exit clauses are not permitted in commercial leases because they convert the lease to a protected lease, which landlords avoid.
Commercial leases are much harder to break than residential leases, given the detailed terms and conditions that they contain. Breaking a commercial lease can result in significant financial losses.
Lastly, commercial leases typically involve longer negotiation periods than residential leases. This is because commercial leases often require specific language that caters to the individual needs of the business owner. Landlords are usually willing to meet these requirements if it means securing a good tenant. It is also crucial for landlords to ensure that the business tenant has the necessary licenses to operate to avoid any issues with the occupancy of the premises, which could significantly impact the footfall for neighbouring premises.
In our next blog, we will discuss how to perform your due diligence when leasing a commercial property in Kenya. Contact us at law@ammlaw.co.ke or 0702045995 for legal advice and representation.
Research by Maureen Kerich & review by Elizabeth Museo